An expenditure is money spent on something. Generally, a business incurs expenditures to increase its efficiency and further returns. The business divides its expenditures into two categories: capital expenditure and revenue expenditure. The capital expenditures are incurred for long term which benefits the business for number of years. On the other hand, the revenue expenditures are temporary which benefits the business within the accounting period. These two expenditures are explained below with examples.
1. Capital Expenditure
Capital expenditure is made to acquire a fixed asset or improve the capability of an existing one. When capital expenditure is made to improve the capability of the asset, it increases useful life of the asset beyond the original estimated life. For example, a machine with an estimated life of ten years is rebuilt after seven years. The extraordinary repairs are expected to extend the useful life of the machine is two years. So, the new estimated life of the machine will be 5 years.
Following are some examples of capital expenditures.
- Purchase of machinery.
- Purchase of office equipment.
- Purchase of building.
- Extension of existing fixed asset.
2. Revenue Expenditure
Revenue expenditure is incurred for carrying day to day business operation. In other words, revenue expenditures are incurred on a regular basis such as printing, stationary, electricity cost, wages, salary, selling, general and administrative. The revenue expenditures are incurred for maintenance rather than enhancing earning capacity of the assets. For example, a company purchases a machine for production of bottles. Whereas the initial purchase and installation costs would be treated as capital expenditure. But any subsequent repair and maintenance costs in future would be treated as revenue expenditure.
Following are some examples of revenue expenditures.
- All those expenses incurred for ordinary conduct of business such as wages, salaries, rent, manufacturing expenses, telecommunication, transportation, advertisement, legal charges, commission, insurance etc.
- Repair, maintenance, replacement and repainting costs.
- Cost of raw material purchased for production.
- Cost of merchandise purchased for resale.
- Depreciation of fixed assets used in business.
It is crucial to understand both capital and revenue expenditures because misrepresentation of them will have a great impact on soundness of the financial statements.